Insight: Five family office traits that throttle success in portfolio companies

Why does the organisational dynamics of so many family offices do more harm than good in helping build a trusting peer-level relationship between portfolio company CEOs and the patriarch or matriarch of the family? If the objective is to attract seasoned executives, who can profitably grow and expand a portfolio company consistent with the purpose of the family’s wealth, then you don’t achieve that by encouraging second-guessing and erecting barriers. Yet that is all too common. Here are some reasons why.

 

Pre-hiring: family office personnel often keep the potential portfolio company CEO at arm’s length from the principal throughout the interview stage

This issue refers to the fears of those who run a family office and the insecurities that pervade their relationship with the principal. Secrecy is a two-way street. Do you want the portfolio company CEO “playing” the family office CEO or the principal because they think that is how they must behave in the role to succeed?  

 

Onboarding: family offices that insist on layers of gatekeepers surrounding the portfolio company CEO

It is all too familiar in many European and Middle Eastern family offices to see a blanket approach applied. Last year, I was asked to resolve a conflict over objectives between a Swiss family office and their portfolio company CEO. The conflict involved a €14 million enterprise value luxury business with over 200 employees, where the newly-hired CEO with an impressive past, presented a vision of the organisation’s ideal future and a route to that destination. Despite this, the vision met with the principal’s strident disapproval.

When I asked how much time prior to and in the three months subsequent to their hiring they had personally spent in each other’s company building a personal chemistry, the answer was two fifteen minute meetings in the principal’s Majorca villa. Left to pick up morsels of second-hand information from the legal counsel, the family office CFO, and directors of the family office, the portfolio company CEO defaulted not unsurprisingly to her own view of the world.

 

Governance: separating the board chair’s symbolic and meaningful role

The inclination of many family offices is to put patronage ahead of the core competencies and passion to address the needs of portfolio companies. There is often a “safe pair of hands” approach used to pick an individual, who will protect the family’s reputation at all costs and who possesses the political antennae to smell trouble. The problem this can cause is that the individual’s skills are largely reactive to events, at a time when the business and the newly installed CEO need to be highly proactive.

 

Communication: distance creates danger in the family office

The further the distance and the colder the relationship between the portfolio company CEO and the family principal, the greater the potential there is for “management on the whim”. Emotion hijacks logic. The principal has a reason for being in the luxury goods, art, tech or hospitality business because he or she has a strong need for affiliation with their peers, an intellectual interest or a cultural affinity. Their ego has been fundamental to their past success, often in their founding business.

When it is left unchecked and there is little tolerance for “push back” in the family office from the portfolio company CEO, trouble lies ahead for all concerned. The principal won’t park their ego, they insist on being the star of the show, irrespective of their ability. The portfolio company CEO is constantly trying to second-guess the principal in an act of futility. When frustration peaks as failure surfaces on the business horizon, the easiest thing to do is to have the family office CEO fire the portfolio company CEO. But the problem hasn’t gone away, it is just stored up for the CEO’s successor.

 

Rewarding the wrong behaviours and results

Family offices can sometimes insist on a methodology to reward results before first figuring out how to produce results in their portfolio companies. It manifests itself in a set of market-based or historic key performance indicators centred on pay, bonus and incentives, which is handed to the leadership team as a fait accompli (“McKinsey or Deloitte tell us….”), ahead of reaching conceptual agreement on the portfolio company’s strategic objectives. Lo and behold, the portfolio company CEO is constantly trying to steer the business in a direction that maximises his or her personal reward, irrespective of the health and well-being of the business.

So the next time a prospective portfolio company CEO walks into the family office and is seated in a comfortable chair in the boardroom, remind yourselves that they represent an opportunity, not a threat. Ask yourself how they might speak favourably of the entire experience running your company, no matter what results might arise. The answers alone might dramatically increase the prospects for success more than you could ever have imagined.   

 

James Berkeley owns and runs Ellice Consulting, a London-based consultancy that works with family offices